PESTEL - what is it and how to apply it to your business strategy

PESTEL is an acronym for a set of questions you should ask yourself about the environment as you embark on developing strategy. PESTEL stands for: 

• Political
• Economic
• Social
• Technological
• Environment
• Legal

Using PESTEL should make you think about the external environment your organisation faces, and so help you to identify the changes that are (or may) happen that will impact on your business, your customers and your industry. Think about these changes as both threats and opportunities.

What are the political threats and opportunities facing us, our market and industry?

• The next election
• Scottish devolution
• UK referendum on EU membership
• The next US presidential election on the US health care industry
• Conflicts in the middle east
• US / China hegemony
• Japan and China in territorial disputes
• Russia and NATO / EU over Ukraine and Eastern Europe

What are the economic threats and opportunities facing us, our market and industry?

• The consequences of falling oil prices
• Stagnation in the Euro zone (or your main export market)
• Changes in exchange rates
• Lower cost economies developing skills in your area

What are the social threats and opportunities facing us, our market and industry?

• The falling percentage of parents that are married
• The percentage of one parent families
• The isolation of the elderly
• Aging population
• Inward migration from other EU countries
• Outward migration to Spain, Portugal, Australia
• The poor education performance of job applicants for certain roles and positions
• The developing of a bio-polar population of educated high income earners and low skilled poorer families
• Work ethic of the next generation
• Changing aspirations in younger people
• Changes in travel habits (where do you locate your business?)
• Changes in buying habits
• Social aspirations and your product / service positioning

What are the technological threats and opportunities facing us, our market and industry?

• The rising resistance to antibiotics
• Continued development of personal health monitoring devices
• Internet security
• The rise of cyber crime
• Space tourism
• Changes in technology that will impact on your business and products
• New substitute products and services being developed
• Your competitor’s next product launch

What are the environmental threats and opportunities facing us, our market and industry?

• Climate change – more extreme weather conditions
• Climate change and where to grow crops
• Water stress
• Shortage of rare earths
• Falling fish stocks
• Rising population and their energy needs
• The finite limit on basic resources such as palm oil
• Changes in attitude to excessive use of resources
• Your products’ use of scarce resources

What are the legal threats and opportunities facing us, our market and industry?

• New rules on cigarette advertising at point of sale
• Changes to taxation in the treatment of repatriated earnings
• Changes to building regulations
• Changes to competition rules
• Changes to pensions and taxation

You will need to think about the mega trends, but don’t forget to think about the local factors - things that directly affect your product/service offering.

PESTEL is one of the first activities to do in a strategy process. My advice is to run this as an exercise on its own and identify the factors that are important to you. Don’t let the conversation drift into “solution mode”. By this I mean, stick to identifying the trends before you decide what to do about them. This is a very simple division of tasks, but the people involved will then know what they are doing in the exercise and you will produce a better result.  Deciding what to do about the issues raised is a separate discussion.

There are basically three steps in a PESTEL process. The first step is to identify the issues that may be of concern. The second step is to investigate these issues so that you are fully informed about the issue and how they may have an impact on your business. The third step is to move into the strategy process and decide what to do about the issues you have identified.

Benefits

• Is quick and easy to use and simple to understand.
• It can be used to engage people in the strategy process.
• It makes people think about the external factors and is a useful precursor to developing your strategy or as part of a SWOT analysis.
• It can be used as a development tool, as the issues identified need to be investigated in some depth.

Pitfalls and shortcomings

• The real opportunities and threats are usually not the obvious items in the headlines; they are often in the detail that directly has an impact on your business.
• Don’t criticise ideas when they are raised. If you do you will stop the free flow and limit the input from your colleagues.
• How are you going to deal with the threats that everyone knows are potentially there but no one wants to talk about?
• How are you going to deal with threats that front line staff recognise as they are starting to encounter them in their day to day work, but that senior management don’t think are important?

Since this article was published, further research has been carried out into the external factors that may affect an organisation's strategy and performance.

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